Japanese Consumer Prices Fall at Slower Pace, May Not Ease Pressure on BOJ

By Mayumi Otsuma -
Jun 24, 2010

Japan’s consumer prices fell at a
slower pace in May, a moderation that may be insufficient to
ease government pressure on the central bank to fight deflation.

Prices excluding fresh food slid 1.2 percent from a year
earlier, easing from a 1.5 percent decline in April, the
statistics bureau said today in Tokyo. The median estimate of
24 economists surveyed by Bloomberg was for a 1.3 percent drop.

Prime Minister Naoto Kan released a plan for faster growth
last week that urged the Bank of Japan to make “utmost
efforts” to defeat the price declines that are hampering the
economic recovery. Some central bank policy makers noted last
month that an improvement in domestic demand is beginning to
ease the pace of the drop, meeting records show.

The yen traded at 89.62 per dollar at 11:05 a.m. in Tokyo
from 89.56 before the figures were released. Japan’s currency
has gained more than 4 percent this quarter, adding to
deflationary pressure by lowering the cost of imports. The
yield on Japan’s 10-year bond rose two basis points to 1.145
percent, after reaching the lowest level since 2003 yesterday.

Impede Growth

Falling prices can impede economic growth by prompting
companies and households to postpone spending. Seiyu Ltd., a
supermarket operator owned by U.S.-based Wal-Mart Stores Inc.,
this week said it will offer discounts on 7,100 items of
clothing, food and household goods until early August to entice
people to spend their summer bonuses.

Kan said on June 14, days after taking office, that the
government and central bank need to work together to overcome
deflation. Finance Minister Yoshihiko Noda said this month that
he wants prices to rise more than 1 percent.

The central bank has kept the benchmark interest rate at
0.1 percent since December 2008, and has since injected cash
into the economy by providing low-interest loans to banks. This
month it unveiled a 3 trillion-yen program to encourage lending
to companies.

“The Bank of Japan is expected to maintain its
accommodative policy stance, and a rate increase will be
delayed at least until fiscal 2012,” said Mitsumaru Kumagai, a
senior economist at Daiwa Institute of Research in Tokyo.
“Deflationary pressure is still strong.”

Export-Led Recovery

Some Bank of Japan members observed last month that price
declines have “clearly” moderated, reflecting a narrowing of
slack in the economy, according to minutes of their May 20-21
meeting. The output gap, a measure of excess supply over demand,
narrowed for a fourth quarter in the January-to-March period.

The export-led recovery “is finally starting to spread
and is alleviating the severity of deflationary pressure,”
Yoshiki Shinke, a senior economist at Dai-Ichi Life Research
Institute in Tokyo, said before today’s report. “The pace of
price drops will keep easing for the time being.”

The slide in prices was even smaller when excluding a
waiver of high-school fees that the government introduced in
April to support households. The waiver pushes down nationwide
core prices by 0.54 percentage point, the bureau estimates.

“We can assume price declines hit bottom” in the first
quarter when excluding the school-tuition factor, Takehiro Sato,
chief Japan economist at Morgan Stanley MUFG Securities Co. in
Tokyo, said before the report. Even so, he added, “prices
won’t surge above water until around late 2013.”

Tokyo Prices

Prices excluding energy and food, a gauge that mirrors the
U.S.’s inflation index, fell 1.6 percent in May, matching the
previous month’s record drop, the statistics bureau said. The
tuition fee waiver accounted for about half of the decline.

In Tokyo, core prices slid 1.3 percent in June from a year
earlier, after falling a revised 1.5 percent in May. Figures
for the capital are released a month earlier than nationwide
data, making them a harbinger of inflation trends.

Even if prices resume rising next year, the gains will be
driven by rising energy costs and the economy’s reliance on
exports and “won’t mean an end to deflation at all,” said
Yasunari Ueno, chief market economist at Mizuho Securities Co.
in Tokyo. “Japan can’t overcome its chronic deflation unless
it resolves the structural problems causing it: the aging and
shrinking population and the shortage of demand.”